Weekly Letter: A Perspective on the 2021 Financial Markets

Jan 08, 2021 | Warren Andrukow


Happy New Year!

2021 has begun where 2020 left off. Investors are looking past COVID-19 concerns and headwinds to near-term economic growth with the view that the second half of the year will mark the beginning of a more permanent and sustainable global recovery once mass vaccinations have occurred. Over the past week, the global media was understandably focused on the chaos on Capitol Hill in Washington, DC. We believe the more meaningful political development from an investment standpoint took place instead in the state of Georgia, with U.S. Senate elections that proved to be surprising. We discuss the implications of the results and share an update on the state of the pandemic.

Georgia on Our Minds

It feels odd to focus on something as granular as a particular U.S. Senate race. Nevertheless, this week’s run-off election for two seats in the state of Georgia proved to be particularly important as it has meaningfully shifted the dynamics of the next U.S. administration.

If you recall, the U.S. elections in November 2020 were three-pronged: the Presidency, the House of Representatives, and the Senate. The Democratic Party won the Presidency and maintained control of the House, while the Senate elections resulted in 50 Republican seats, 48 Democratic seats, and 2 seats that were undecided. The latter were previously held by the Republican Party for the past 15 years in the historically conservative state of Georgia. No Senate candidate in the state had more than the 50% required to win last fall’s election. As a result, a run-off election was held this past week, and resulted in an outcome that seemed to defy all odds. The Democrats won both seats. With the Vice President holding the tie-breaking vote in the Senate, this week’s development now means that an upcoming “Blue Wave”, in which the Democrats control the Presidency and both chambers of Congress, has become a reality.

Why does this matter? A government largely controlled by one party – as the U.S. is about to have - faces fewer hurdles in passing new legislation. Nevertheless, we still don’t expect to see the kind of sweeping policy changes that some investors have feared, particularly as it relates to taxes – corporate and personal - and regulation across sectors such as energy, technology, and health care. Instead, we expect the changes to be incremental and more benign in nature. The reasoning is that despite the fact the Democratic Party will effectively have control over the Senate, there are far more centrists that have been elected. A tied Senate has historically led to more bipartisanship with coalitions forming among the so called moderates within both parties. This should help limit the extent to which any drastic policy measures get approved.

Importantly, we expect the new U.S. administration to immediately pursue a larger and more meaningful stimulus program aimed at helping the U.S. economy through the year. This should underpin the positive investor sentiment that already exists today and in particular be supportive for valuations in the more economically sensitive areas of the equity market.


On the surface, not much appears to have changed on the pandemic front in recent weeks. New daily infections continue to move higher as they have for some time across a range of countries: Canada, the U.S., South Africa, the United Kingdom, and Japan, for example. But, there have been two noteworthy developments in recent weeks that are worth discussing.

First, at least one new strain of the virus has been formally identified. Unfortunately, its transmissibility has been reported to be much higher than the original pathogen, though no more deadly. This may help explain why the infection and hospitalization rates in the United Kingdom, where it was first discovered, have jumped significantly over the past month, forcing governments to undertake more restrictive lockdowns across certain parts of the region. That hasn’t been the case elsewhere in Europe, where case figures have yet to show the same kind of surge seen in the U.K. The new strain has been detected elsewhere, including in North America.

The second development is on the vaccine front as inoculations have begun. There has understandably been frustration with respect to the pace of vaccinations, with year-end figures falling short of initial estimates. However, it is worth remembering that the mere discovery of a successful vaccine – and approval within the past month - was a huge triumph in itself. Executing a mass program for billions of people was always going to prove to be an extremely complex logistical undertaking. The pace has begun to accelerate, with millions of people around the world having been vaccinated over the past week alone. Moreover, there may be additional vaccines available over the next few months with Johnson & Johnson and AstraZeneca each having candidates that are expected to apply for emergency use authorization.

Investors – and everyone for that matter – will need to remain patient. We continue to focus on the bigger picture – the vaccination process is underway, likely to accelerate, and should pave the way for an eventual relaxation of restrictive measures and reopening of the global economy later this year.

Market Decline and Recovery Results

The peak-to-trough numbers for the current market decline and subsequent recovery are provided in the table below, as of today’s closing prices. As a result of this week’s upward movement, all four major equity market geographies, including Canada, have recovered fully to the previous peak levels experienced in early 2020. Leading the way with the largest recovery are the emerging market countries, which have now surpassed last year’s annual highs by 14.24%. Of the four country / geographic regions, Canada has been the least resilient through the COVID downturn. The Canadian market is now marginally above the 2020 annual high of 17,791 – as measured by the TSX index – a level that was also the previous all-time high.